CRL nears 85% capacity use, but says sector pricing won't improve yet

By Dan Stanton+Dan Stanton11-Aug-20142014-08-11T00:00:00ZLast updated on 11-Aug-2014 at 16:43 GMT2014-08-11T16:43:39Z

Charles River Laboratories is approaching its optimal capacity utilisation but says pricing will not improve until the rest of the preclinical CRO industry follows suit.

The preclinical contract research organisation (CRO) has reported robust second quarter 2014 financials with total revenues of $341m (€255m), up 17% on the same period last year, and net profit of $36m, up 29%.

CRL’s Discovery and Safety Assessment (DSA) business - commonly referred to as toxicology or preclinical services – grew 33% on the second quarter 2013 to $143m and although some of this growth was attributed to the acquisition of Galapagos subsidiaries Argenta and BioFocus in April, CEO James Foster also spoke of the continued rising demand across the preclinical space.

In 2013, capacity use across the preclinical services industry was around 65-70%.

Capacity utilsation at CRL is now some way ahead of this according to Foster, who told investors the firm is rapidly approaching the 85% level that is widely acknowedged as being the optimum for the cost-conscious contract research sector.

But despite the higher demand seen by CRL, Foster said he does not beileve prices will improve industry-wide for the time being because there is “more capacity in the system than people are letting on.”

“We are careful about adding space because despite the fact that our capacity is nearing full utilization, pricing will not improve significantly until industry capacity has filled as well” Foster said, adding "We still don't feel that we're getting paid well for the quality of our services, although we're trying to make up for that by being as efficient as possible.”

Mixed response

Response to CRL's second quarter figures was mixed.

Citigroup analyst Garen Sarafian was cautious about drawing any conclusions about industry pricing based on CRL's gains, suggesting that: “there may be additional capacity from both Charles River and peers weighing on price."

William Blair analyst John Kreger was more upbeat saying that: "Our thesis on the stock is beginning to change for the better as toxicology demand is showing signs of notable improvement. We believe this performance is further evidence that broader outsourcing demand trends are starting to rebalance across early and late stage."

"Management confirmed capacity was filling up and approaching the optimal 85% utilization level, but again said that price has yet to follow. We view this statement as quite encouraging, suggesting the large jump in operating margin was driven by utilization and mix.